This case considers who was the true owner of five trucks
which were acquired by the appellant through a series of transactions, where
the supplier and floor plan agreements reserved ownership for the financier as
security, of the trucks that it financed, but which it had not and did not
intend to take possession of, until full payment was received. The court had to determine whether the parties
were dealing with a simulated transaction as contended by the applicant.
Furthermore, Wallis JA, through his obiter
dictum, shed some light on the correct interpretation and application of
the decision reached in South African
Revenue Services v NWK Limited 2011 (2) SA 67 (SCA) in respect of simulated
transactions.

Facts

The appellant, Roshcon (Pty) Ltd (Roshcon) was in the
business of infrastructure development, civil and electrical infrastructure and
waste beneficiation and received a contract in September 2008 which required it
to order five trucks (three 9 ton trucks and two 14 ton trucks) which would
need further modification to hold special cranes. The trucks were ordered from
Toit’s Commercial (Pty) Limited (Toit’s), who in turn ordered the trucks from
Nissan Diesel (SA) (Pty) Limited (Nissan Diesel). The transaction was financed
by Wesbank, who purchased the trucks from Nissan Diesel under a supplier
agreement and who then subsequently supplied the vehicles to Toit’s through a
floor plan agreement. Both the supplier agreement and the floor plan agreement
were made subject to the suspensive condition that the ownership would remain
with the selling party, until such time as the dealer paid the full selling
price. Wesbank paid the full purchase price to Nissan Diesel and subsequently
obtained ownership in the vehicles.

The agreement between Wesbank and Toit’s determined that the
trucks would be delivered to Toit’s or some other person that Toit’s may
direct. Consequently, the five trucks were delivered by Wesbank to Anchor Auto
Body Builders CC (Anchor) to have the trucks modified. On 19 November 2008, two
trucks were delivered to Roshcon after they were modified and both
representatives of Roshcon and Anchor signed the handover sheet for the two
trucks in question. On 21 November 2008, Roshcon took delivery of the other
three trucks by signing the handover sheet for it, but did not physically
removed it as it remained in Anchor’s possession. Roshcon paid Toit’s for all
five trucks on the 28th of November 2008 and the documents constituting
the proof of delivery were handed by Toit’s to Roshcon. However, Anchor who
modified the trucks refused to release the three trucks in its possession
because Toit’s has not paid it. Roshcon subsequently paid Anchor for the
modifications and Toit’s went into liquidation without paying Wesbank for the
five trucks.

Given the fact that Toit’s had not paid Wesbank for the five
trucks, Wesbank claimed ownership of the five trucks in terms of the suspensive
clause in the floor plan agreement. Anchor released the three trucks in its
possession to Wesbank, who subsequently sold two of them to Unitrans Supply
Chain Solutions (Pty) Limited (‘Unitrans’).

Roshcon’s approach the court on the basis that it was the
owner of the trucks and that the supplier and floor plan agreement were a
simulation in that Wesbank could not reserve ownership where it never had or
intended to take possession of the trucks. Roshcon contended that the floor
plan agreement was a loan against the security of the trucks without Wesbank
having to take possession thereof, thereby securing an advantage which the law
would otherwise not allow. Wesbank reiterated that the onus of proving simulation rests upon Roshcon and that Roshcon has
failed to discharge such an onus.
Wesbank further contended that the proviso in the contracts to reserve
ownership as security to protect itself was commonly used by many financial
institutions in South Africa in providing asset based finance.

Roshcon pleaded in the alternative that Wesbank was estopped
from claiming ownership of the trucks to which Wesbank responded by contending
that Roshcon has failed to discharge the onus
as it never made any representation to Roshcon that Toit’s was the owner of the
trucks or that Toit’s was entitled to dispose of the trucks. Roshcon then
contended that it acquired ownership when it took delivery of the trucks and
paid Toit’s in full and that Wesbank’s claim of ownership is based on simulated
agreements contained in the supplier agreement and floor plan agreement.
Roshcon further contended that the reservation of ownership in the floor plan
agreement concealed a loan agreement secured by a pledge without possession,
but purporting to be a sale agreement.

The court had to decide whether the parties to the contract
intended to give effect to it in accordance with its tenor (i.e. whether the
contract was simulated).

Held

In arriving at a decision the SCA examined the principles in
both Zandberg v Van Zyl 1910 AD 302, CSARS v NWK 2011(2) SA 67 (SCA) and Nedcor Bank Ltd v ABSA Bank Ltd 1998 (2)
SA 830 (W) and held that it is not necessary to consider other cases as the
decision as to whether simulation is present is fact specific. The Zandberg and
NWK case was considered from a general perspective, whilst the Nedcor case had
very similar circumstances to the one before the court.

The court held that although Toit’s handed over all the
necessary documents to Roshcon, it could not in law transfer ownership to Roshcon
as the ownership was reserved to Wesbank until Toit’s paid the full purchase
price with interest to Wesbank. The court further held that Roshcon was aware
of the fact that Toit’s has not yet paid Wesbank and that it therefore took a
risk in paying Toit’s the full amount.

In deciding whether simulation was present, the court confirmed
the the principles in Dadoo and others v Krugersdorp Municipal
Counsel 1920 AD 530 at 548 where it was held that parties may genuinely
arrange their transactions so as to remain outside the scope of its provisions
and that this fact on its own does not render a transaction a simulation.

With regards to the question of simulation, the SCA held
that the ownership reserved to Wesbank in the floor plan agreement did not in
itself constitute simulation and that Roshcon failed to discharge the onus of proving that the agreement was
simulated.

With regards to the question of estoppel, the court held
that the estoppel principle will only apply to the two trucks in Roshcon’s
possession and the one in Wesbank’s possession and that the onus of proving estoppel rests upon
Roshcon. The court held that Wesbank had not made any representations to
Roshcon and that Roshcon relied on the representation made by Toit’s. For that
reason, the defence of estoppel had failed.

The appeal was consequently dismissed with costs.

Concurring judgement delivered
by Wallis JA on the NWK case

In the NWK case, it was held at par 55 that if the
commercial purpose of the transaction was to achieve ‘… an object that allows for the evasion of tax or of a peremptory
law…’, then the transaction would be regarded as simulated. This judgement
was the cause of various scrutiny and uncertainty among academics which held
that the case may be interpreted to exclude the ratio decidendi of the Dadoo case and that it substantially
broadened the scope of what may be regarded as simulated (i.e. contracts
facilitating tax avoidance).

It was, in the current case, pointed out by Wallis JA that
the Zandberg case is still the foundation of law relating to simulated
transactions in that ‘… the court must be
satisfied that there is a real intention, definitely ascertainable, which
differs from the simulated intention…’ and that this inquiry is fact
specific for which no general rule can be laid down. The courts will therefore
investigate the intention of the parties to determine if an agreement is
simulated. It was further pointed out, as was held in the Dadoo case, that
parties may arrange their transactions in such a manner as to remain outside
the provisions of a statute.

At par 27, Wallis points out that whether a transaction
would be regarded as simulated, depends on its genuiness which would depend ‘… on a consideration of all the facts and circumstances surrounding
the transaction’. At par 30, Wallis JA provides a quote of Watermeyer
JA which consolidated both the principles of the Zandberg and Dadoo cases in an
attempt to distinguish between simulated and genuine transactions, the relevant
part reading as follow:

"A transaction is not necessarily
a disguised one because it is devised for the purpose of evading the
prohibition in the Act or avoiding liability for the tax imposed by it. A
transaction devised for that purpose, if the parties honestly intend it to have
effect according to its tenor, is interpreted by the Courts according to its
tenor, and then the only question is whether, so interpreted, it falls within
or without the prohibition or tax.

A disguised transaction in the sense in which
the words are used above is something different. In essence it is a dishonest
transaction: dishonest, in as much as the parties to it do not really intend it
to have, inter partes, the legal effect which its terms convey to the outside
world. The purpose of the disguise is to deceive by concealing what is the real
agreement or transaction between the parties.The parties wish to hide the fact that their real agreement or
transaction falls within the prohibition or is subject to the tax, and so they
dress it up in a guise which conveys the impression that it is outside of the
prohibition or not subject to the tax. Such a transaction is said to be in
fraudem legis, and is interpreted by the Courts in accordance with what is
found to be the real agreement or transaction between the parties.” (own emphasis added).

The courts would therefore
distinguish between an honest transaction which was entered or so worded to
avoid the provisions of a statute (i.e. tax) versus a transaction falling in
the taxing provisions of a statute but disguised to make it appear as if it
does not. In referring to the NWK case, Wallis JA conceded that with tax, the
courts are required to apply the above principles in a different context as parties
would ‘build a transaction’ in order to make use of different loopholes in tax
legislation. These additions to a straight forward commercial transaction would
normally add no value to the underlying transaction which would cause the
courts to strip away the unrealistic elements in order to disclose the true
underlying transaction.

Wallis JA (presumable preferring
to the NWK case) reiterated that ‘…
nothing said subsequently in any of the judgments of this court dealing with
simulated transactions alters those original principles in any way or purports
to do so’ and that ‘the court examines
the transaction as a whole, including all surrounding circumstances, any
unusual features of the transaction and the manner in which the parties intend
to implement it, before determining in any particular case whether a
transaction is simulated’.

The commercial purpose of the
transaction is therefore only one of the factors that would be considered and
the common belief, based upon the NWK case, that transactions structured to
avoid tax would be classified as simulated is incorrect – the court will still
investigate all of the surrounding circumstances of the transaction to
determine if simulation is present.

WHY REGISTER WITH SAIT?

Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.